Thursday, October 18, 2007

How to be a Redistributionist

Robert Reich, former Labor Secretary in the Clinton Administration, tells us what he would do to the tax code:

What’s fair? I’d say a 50 percent marginal tax rate on the very rich (earning over $500,000 a year). Plus an annual wealth tax of one half of one percent on net worth of people holding more than $5 million in total assets....If the Democrats stand for anything, it’s a fair allocation of the responsibility for paying the costs of maintaining this nation.

I don't agree with the policy, but I appreciate how forthright he is about his policy preferences.

the optimal system for most redistributional preferences consists of a large demogrant that is rapidly taxed away for low income taxpayers, with lower marginal rates at higher income levels.

Realistic optimal tax problems don't usually yield solutions similar to Reich's proposal, even for a social planner who has strong preferences for equality. High tax rates at the top generate a lot of deadweight loss for each dollar of tax revenue. In most standard optimal tax models, a more redistributionist social planner would give more to the poor and impose higher marginal tax rates on everyone, but she would not focus disproportionately on the the very top of the income distribution. And she would not add an extra penalty to capital accumulation, as Reich is proposing.

If I were a redistributionist, here is what I might propose: A large fixed payment to every citizen, paid at the beginning of every month, financed by a proportional tax on consumption, such as a value-added tax.

About Me

I am the Robert M. Beren Professor of Economics at Harvard University, where I teach introductory economics (ec 10). I use this blog to keep in touch with my current and former students. Teachers and students at other schools, as well as others interested in economic issues, are welcome to use this resource.